Week 8

Question 1

Advantages of vertical integration

Answer 1

Reduction of production/distribution/transaction costs
May help to protect quality

Protection of technology (otherwise risk of leaks)
Securing key suppliers or sales

Reduce the threat of opportunism

Question 2

What costs are meant by transaction costs

Answer 2

Finding a suitable party
Drawing up a contract
Enforcing a contract
Dispute resolution

Question 3

High asset specificity may lead to:

Answer 3

High transaction costs
So: drives the choice to vertically integrate

Question 4

What types of asset specificity are there

Answer 4

Physical asset specificity
Site specificity
Human asset specificity
Dedicated assets

Question 5

What are the disadvantages of vertical integration?

Answer 5

Overal cost disadvantage
Can lead to increased financial volatility (due to fixed costs)
Entail additional managerial costs to keep the quality up
Firm may become myopic

Question 6

How does the organisation of the vertical integration looks like?

Answer 6

Via a U form

Question 7

Name advantages and disadvantages of the U-formed organization

Answer 7

+ Specialization
- Conflict between managers
- Requires significant coordination

Question 8

How to compensate in a vertically integrated firm?

Answer 8

Compensation policies should be dependent on the reason why we have integrated vertically